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Rating Action:

Moody's assigns first-time B1/(P)B2 ratings to Zhong An

24 Jan 2011

Hong Kong, January 24, 2011 -- Moody's Investors Service has assigned a first-time B1 corporate family rating to Zhong An Real Estate Ltd.

Moody's has also assigned a provisional (P)B2 rating to the company's proposed RMB-denominated USD senior unsecured bond issue.

The ratings outlook is stable.

The proceeds from the bond issue will be used to fund Zhong An's land acquisitions and working capital requirements.

The bond's provisional rating status will be removed after Zhong An has completed the issuance of the bonds, and all satisfactory terms and conditions have been met.

RATINGS RATIONALE

"Zhong An's B1 corporate family rating reflects the company's small-scale operations and material geographic and cash flow concentrations in comparison to other rated Chinese developers," says Kaven Tsang, a Moody's AVP/Analyst.

"Moody's expects that Zhong An's sales will be more volatile due to the company's heavy reliance on a few key projects, mainly Landscape Bay, the International Office Center, and the Yuyao project," adds Tsang, who is also Moody's lead analyst for Zhong An.

"In addition, its expansion plan will entail high execution risk given its lack of a track record for such a rapid expansion, as well as a more challenging Chinese property market in 2011," says Tsang.

The development of commercial properties such as the International Office Center will partly mitigate the performance volatility stemming from the negative impact of regulatory measures on the residential sector. However, the sustainable demand for large-scale commercial projects in Qianjiang Century City, Hangzhou remains untested.

Still, Zhong An's established brand in Hangzhou and its niche business model, which focuses on the affluent Yangtze River Delta region, will benefit from the demand for high-end properties and the fast growing economies in the region over the medium to long term.

In addition, the company's projects and land bank in Hangzhou are in good locations, and the land costs for some of the projects have been low. These factors support the company's moderate profit margin and allow for some flexibility for price adjustments in a down market.

Zhong An's bond rating is notched down to B2 due to structural and legal subordinations. The ratio of secured and subsidiary debt to total assets stood at 21.3% as of June 2010. Moody's expects that this ratio will stay around 20-25% for the next year or two.

The stable outlook reflects Moody's expectation that Zhong An will maintain its niche business model with its focus on Yangtze River Delta, as well as obtaining funding from onshore banks.

The rating could be under pressure for a downgrade if (1) Zhong An's sales or operating cash flow are weaker than anticipated; or (2) its balance sheet cash is lower than expected; or (3) it materially accelerates development and makes aggressive land acquisition funded by debt.

Moody's would regard the following financial metrics as signals for downward rating pressure: (1) adjusted debt/capitalization consistently above 55%; or (2) EBITDA interest coverage below 2-2.5x.

The prospects for upward rating pressure are limited over the near term.

Over the medium term, however, positive rating pressure could emerge if Zhong An (1) achieves its planned sales growth with stable profit margins; (2) decreases its geographic concentration risk; (3) achieves a stable financial profile with adjusted debt/capitalization of 45-50% and EBITDA interest coverage above 4-5x; or (4) strengthens its liquidity by broadening its banking relationships and expanding its free cash flow, which will support its growing scale of operations.

The principal methodology used in this rating was Moody's Global Homebuilding Industry published in March 2009.

Zhong An Real Estate Ltd. develops residential and commercial properties in the Yangtze River Delta Area. It has a land bank of around 6.2 million sqm in gross floor area (for 2.2 million sqm of which it has yet to obtain the land certificates) distributed mainly in Hangzhou and Zhejiang Province, as well as Huaibei and Hefei in Anhui Province. Zhong An also has a small investment portfolio, with a hotel (Holiday Inn) and a retail mall (Highlong Plaza) in Hangzhou.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Hong Kong
Kaven Tsang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Peter Choy
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns first-time B1/(P)B2 ratings to Zhong An
No Related Data.
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